“When forced to choose between optimising the appearance of our GAAP accounting and maximizing the present value of future cash flows, we’ll take the cash flows.”—Amazon CEO Jeff Bezos, 1997 letter to shareholders
“[B]ased on what we’re seeing with Kindle Fire pre-orders, we’re increasing capacity and building millions more than we’d already planned.”—Amazon CEO Jeff Bezos, Q32011 earnings release
Amazon delivered earnings yesterday which disappointed Wall Street, and sent the stock tanking.
Revenue was a slight miss and earnings were a big miss. Startlingly, the company guided to a possible loss next quarter.
But we actually like what we saw. The revenue miss was small. But, importantly, the earnings miss came mostly from increased investment in two areas: fulfillment and distribution centres, data centres for its cloud business, which Amazon has been building out, and Kindle devices, notably the Kindle Fire. This is good news.
Amazon is seeing huge demand, and responding to it. Big demand for its commerce business, which is about 0.5% of global retail, for its cloud business, which is rip-roaring (as you can see on the chart at right), and huge demand for its Kindle, which is the future of its media business, which is about 45% of revenue. When a CEO says that he’s losing money because he’s “investing” for “the long term”, scepticism is understandably warranted. But we can’t think of anyone who has more credibility in saying that than Jeff Bezos, because he has already done it, and delivered.
Yesterday’s earnings all but prove our thesis on the Kindle Fire: that Amazon loses money on each unit, and that the tablet should be a blockbuster. Cue the joke about losing money on every unit but making it up with volume. Except that for the Kindle, it’s probably true. Each Kindle Fire sale should be seen as Amazon buying an annuity. Each Kindle device is a catalogue of content, ads and commerce that Amazon will then harvest.
And meanwhile, Amazon’s core business is as strong as ever:
Amazon is investing in amazing opportunities in big markets. It’s going to make its P&L look ugly for a while, but these are amazing opportunities where Amazon is delivering. As Jeff Bezos said in his original shareholder letter, Amazon is maximizing the present value of future cashflows. So we view yesterday’s earnings as good news from Amazon.
PREVIOUS AMAZON COVERAGE:
- Why The Kindle Fire Will Be A Blockbuster →
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